A perspective on the solutions offered in last-ditch efforts of old government

Lost signals

The political context of its presentation reveals real dimension of governance failings in the past two years.

Analysis of the plan’s composition shows it to be disparate and desperate.

Economic reality will require huge efforts beyond the scope of the last plan.

What to do with the political products of October 2019, most prominently the 2020 budget draft approved on October 21, and the economic rescue plan that then-Prime Minister Saad Hariri presented on the same day? Having arrived alongside the total novelty of a budget draft that was completed and properly signed within the constitutional time frame, the plan for national economic rescue efforts by the cabinet miraculously appeared after a mere 72 hours of negotiation.

However, just over a week later the plan was pulled with the cabinet’s resignation. Is it now a curio for academic study on whether it could have worked? Or, on the basis—by no means certain—that there will be a near-term formation of a new, more ethical, and more technocratic government, could the plan assist in and speed up the desperate search for necessary economic solutions?

The first thing that becomes obvious from examining this plan is that it was not an instantaneous creation. Many of its components are awfully familiar as either proposals that have their roots in the early Hariri era—over two decades ago—or as cabinet projects that have been negotiated back and forth at the Grand Serail in the past two years, falling victim to obstructionism. But as comforting as it is that these ideas were not just pulled out of thin air, the downside is that this is irrefutable evidence that political factors allowed the economy to worsen over the past two years.

Beyond endurance

While everyone was paying lip service at the bedside of the ailing Lebanese economy it was edging nearer to total monetary paralysis and asphyxiation that could have been prevented through concerted resuscitation measures by politicians. The demand for a rescue agreement and its last-hour presentation points to the reasons for the underlying and maddening inertia of the now resigned government.

To quote Hariri’s speech on October 18: “I have been trying for three years to treat its reasons and find real solutions. For more than three years, I told all our partners in Lebanon that our country has been exposed to circumstances beyond its will and is spending, year after year, more than its income. The debt has become so great that we can no longer endure.”

The existence of political obstructionism in this government was no secret, and Hariri previously publicly expressed that he would be able to achieve wonders if crucial initiatives only could proceed unimpeded. It was also obvious that his purported unity government was an arena of badly conflicting interests. But it was still shocking to confirm the utter lack of rational self-interest in the ruling class. Learning that zero trust was the only thing that this government deserved—from beginning to end—adds more pain to having seen Lebanon stumble so deliriously through the last 17 months.

Secondly, while Hariri has throughout his political career raised the eyebrows of both opponents and non-partisan observers through his actions and indecisions, his last ditch efforts to produce an economic plan and his speech announcing his intention to resign showed a strength of character often criticized as lacking. But still it seems he was not able to acquire all of the requisite strength and decisiveness needed to lead in the Lebanese arena of never-ending political conflicts.

He noted in his October 18 speech: “As I tried to implement [CEDRE], I encountered all types of obstacles, starting from the formation of government that took weeks, months, and seasons!” Referencing obstructionism three separate times, Hariri said that at the end of efforts to reach an agreement on approaches to the electricity file, deficit reduction, and reform of administrative bodies, each time “someone came and said: ‘This cannot work.’”

Thus, context-wise, the October 18 speech demonstrates both the lack of any sense of national responsibility among an unknown number—likely an absolute majority—of the ruling class, and weaknesses in leadership that did not allow for success despite intense and sincere efforts. Content-wise, however, the question remains if the plan could be used as a blueprint for the next government as a last, post-post deadline effort to pull the economy out of its desperate situation.

The topline impression of the list of measures presented by Hariri on October 21 is not one of a strategically focused plan, but a garage sale of reform, revenue, and cost-cutting propositions. In Hariri’s own description, what he presented was not an economic plan, but an agreement with his partners in government on the “minimum necessary actions” that have been needed these past two years.

Counter-intuitive

The list that Hariri read out entails 17 points, the first of which directly gives the appearance of insincere grandstanding by trumpeting two counter-intuitive messages—that there will be no new taxes but a fantastic numerical reduction in the deficit to 0.6 percent. This means a target of wanting to almost eliminate the deficit in a single leap by an even larger margin—some 700 basis points from 7.6 to 0.6 percent than in the 2019 budget, where the target of deficit reduction by around 400 basis points was met with disbelief by the international financial community. Notably here, the CEDRE agreement stipulated a commitment to a—regarded then as difficult but doable—reduction of 100 basis points per year.

In the further array of budgetary and non-budgetary measures that Hariri presented, one cost reduction target referred to lowering the EDL-related deficit by a LL1 trillion (over $660 million). Three additional points in the list relate to cost cutting, most eye-catchingly via a 50 percent reduction in salaries and retirement benefits of top-tier public servants, but also through 70 percent reduction of allocations to institutions such as the Council for Development and Reconstruction, the Central Fund for the Displaced, and the Council for the South, plus the abolition of superfluous public sector institutions, beginning with the Ministry of Information.

On the revenue and investment side, the most prominent point high up in the list refers to financial sector contributions and support for the state finances to the tune of $3.3 billion, besides allusions to activation of the first phase of CEDRE disbursements, foreign investment, and social loans, as well as laws that will facilitate recouping looted public funds. The feasibility of the core revenue proposition involving the central bank and the commercial banking sector is an invitation for comments (most of which would have yet to be made) ranging from technical and legal questions to discussions of ethics, fairness, and economic effectiveness.

The list that Hariri read out entails 17 points, the first of which directly gives the appearance of insincere grandstanding by trumpeting two counter-intuitive messages.

Two other points in the list point to projects that imply cost reductions and revenue increases with somewhat delayed impact, but also appear to require immediate funding—namely speeding up tenders for the construction of power plants and installing border scanners to combat smuggling and improve customs revenues.

There are also mentions of popular legislative projects such as the amnesty law, the afore cited draft law for recovery of looted money, a law to establish the national anti-corruption commission in the near future (it was passed by Parliament in July but was returned by President Aoun with 11 objections), and an agreement on enabling independent regulatory authorities by appointing their boards. Social measures in the list entail an allocation of $160 million in support of housing loans, the institution of a pension fund, and the allocation of LL20 billion and a World Bank concessional loan of $100 million to the National Poverty Targeting Program.

The final numbered point in the 17-point list mysteriously resurrects project names Linord and Elyssar. These were two large urban development and housing projects that were once introduced by Rafik Hariri (and were alluded to by Saad Hariri in an investment forum at the end of 2018) but have long vanished from research focuses and have not recently appeared in concepts like the McKinsey Lebanon Economic Vision, an October 2019 whitepaper by the Lebanese International Financial Executives, nor mentioned by civil society and economic stakeholders in their comments on Executive’s Economic Roadmap project.

Hariri concluded his presentation with a reference to the intention to privatize the mobile communications operators Mic 1 and Mic 2, and an assertion that there is “a complete change of mentality in this budget. Investment spending from the budget is almost zero, thus closing the door on squander and corruption because the government does not spend a penny. The entire expenditure is from foreign investment.”

Notably, measures discussed in the final weeks of this cabinet went beyond the points that Hariri touched upon on October 21. If the analysis is widened to cabinet statements circulated by the prime minister’s press office on October 16, 17, and 18, measures communicated then to the media by Minister of Information Jamal Jarrah, the list of measures and propositions extends first of all to the infamous Voice over Internet Protocol (VoIP) fee proposal, dubbed the WhatsApp tax and referred to on October 17 as having a projected revenue potential of $250 million annually. This VoIP fee was renounced the same day protests began, but sparked protests that ended up damaging and depriving the Lebanese economy of revenues to the magnitude of more than a billion dollars (some unconfirmed estimates said $100 million a day).

A bit less spectacular, but not entirely free of problems were the measures Jarrah announced on October 16, namely a decision by the Ministry of Finance to increase fees on tobacco products, the above mentioned installation of scanners at border points, a decision for all investment decisions by public institutions and utilities to need cabinet approval, and an agreement on “the principle of corporatization” for the Port of Beirut and other, not specified institutions. He also reported on cabinet discussions that were related to taking an inventory of state-owned real estate, a three-year investment program related to CEDRE and the Capital Investments Plan, the pension law (as referenced by Hariri on October 21), and a proposed 5 percent subsidy to industrial exporters that would be paid on the amount by which they increased their exports from year to year.

Too many unknowns

In the October 18 speech, in which Hariri gave his government colleagues 72 hours to come up with solutions, the prime minister explicitly referred again to the need to alleviate the burden of electricity subsidies, and implement the electricity plan and CEDRE process. On that day, and again on October 21, Hariri’s list was high-level and broad, factors that do not favor a quick analysis of its diverse content—the same is true for some of the measures announced previously by Jarrah. Yet, it is difficult to shake the impression that the government’s search for solutions since days before and throughout the protests was frantic, but not ordered strategically. It remains at the end of a brief review of the government’s October reform deliberations unknown whether the debt, the entrenched high trade deficit, underdeveloped industrial productivity, shortfalls in international competitiveness, insufficient capital markets, poor financial inclusion, growing economic informality, weakness of redistributive justice and direct taxation and plutocratic patterns that are as bad as those in the most capitalist countries could be cut if only the iron bonds around the knot, the systemic bonds of clientelism, sectarianism, and corruption, are broken.

It is difficult to shake the impression that the government’s search for solutions since days before and throughout the protests was frantic, but not ordered strategically.

In recent months, there have been other narratives put on the table than the narratives of austerity, increased taxation of functioning and fiscally more transparent sectors, notably banking, and total abstinence from own investment risk by the government. There has been some progress but no results yet in areas of privatization, public-private partnerships, and activation of capital markets. The concept of an Electronic Trading Platform and invigoration of capital markets has excessively been referenced as crucial means to improve the transfer of private and non-productive savings into hitherto state-owned and affiliate enterprises, such as the flag carrier Middle East Airlines and the telecommunications sector (where privatization and license auction concepts have been tossed around for two decades). Banking leaders have presented their views on the importance of banks’ ability to finance private and public sectors by not being unfairly taxed. There has been enough said to provide a platform for serious, non-ideological discussion that is neither sectarian nor ignorant nor based on obviously partisan and self-interest narratives of self-righteous and narrow interest groups—communal, sectarian, economic, political, or civil society.

Despite all new or previous economic planning, up to the Hariri economic rescue plan from October 21, it remains uncertain what way will work best out of this incredibly deep mess, and it is an equally open critical question if the economy of Lebanon can be rescued by an immediate switch to governance by persons with peak theoretical knowledge and expertise but no wide political experience, or people of great technical training who did not have to previously face the opportunity and temptation to become corrupt.